The fund rose 3.7% in February, compared to the fund´s benchmark MSCI FMxGCC Net TR (SEK), which rose 2.8%. Positive relative contributions accrued from the fund’s positions in Egypt and the underweight in Argentina. The fund’s underweight in Vietnam (mainly lack of positions in the largest blue-chips) and the lack of positions in Romania, lowered the excess return to a moderate extent. During the month, we did some rearrangements in the Vietnam portfolio. The Vietnamese consumer conglomerate Masan Group is once again part of the portfolio now that the stock, in our eyes, has come down to attractive levels. The purchase was financed through the sale of the tire manufacturer DRC, the infrastructure company Ho Chi Minh Infrastructure, and Vietnam Electric, which is a subcontractor to the power industry.

MARKET

MSCI FMxGCC Net TR (SEK) rose 2.8% during the month, compared to MSCI EM Net TR (SEK), which rose 2.4%. The primary positive contributions accrued from the rise of Vietnam and Romania, both rising about 12% during the month. Negative contribution was mainly caused by Argentina (-9%), which fell back after a strong performance in January. So far, we interpret the better market for the asset class in 2019 mainly as a reaction and attempt to form a bottom range after the very weak 2018. We are still seeing a rise in relatively low volumes, where foreign investors are still cautious and worried about renewed concerns similar to the ones we saw in the fall of 2018. Based on our discussions with investors, we note that these are generally aware of the historically low valuations across most of our markets, but that global concerns remain an obstacle for further allocations. This constitutes an interesting situation where increased volatility globally can generate a new wave of selling, but where the absence of global shocks in the next few months could lead to inflows to the asset class. All in all, the low valuations, and the fact that we should have seen the worst of the devaluation-wave in 2018, the risk on the upside appears greater than vice versa.

DISCLAIMER: Capital invested in a fund may either increase or decrease in value and it is not certain that you be able to recover all of your investment. Historical return is no guarantee of future return. The state of the origin of the Fund is Sweden. This document may only be distributed in or from Switzerland to qualified investors within the meaning of Art. 10 Para. 3,3bis and 3ter CISA. The representative in Switzerland is ACOLIN Fund Service AG, Affolternstrasse 56, CH-8050 Zurich, whilst the Paying Agent is Bank Vontobel Ltd, Gotthardstrasse 43, CH-8002 Zurich. The Basic documents of the fund as well as the annual report may be obtained free of charge at the registered office of the Swiss Representative.

In February, the fund went down 3.6%, compared to the benchmark MSCI Pakistan Net (SEK), which went down -2.6%. The month was marked by heightened geopolitical tensions between Pakistan and India despite much needed improvements in macroeconomic indicators being seen.

In the outgoing month, the fund´s main underperforming exposures were Materials and Communication Services, whereas the outperforming exposure accrued from underweight in the Financial as well as the Energy sector. During the month, we reduced our exposure in liquid blue-chip banks and increased our exposure in the attractive consumer linked Materials sector.

MARKET

In February, Pakistan was embroiled in heightened geopolitical tussles with India when Pakistan downed two Indian fighter jets in Pakistani territory, in which one pilot survived and was captured, but later released as a “gesture of peace”. The circumstances have raised fear and the hostilities between the two nations have intensified. However, the US, UK, China, Saudi Arabia, and UAE has intervened resulting in decreased tension between the two nations. The Prime Minister of Pakistan, Imran Khan, has repeatedly, and for some time now, empathized “give peace a chance” as one of his core values and has offered to investigate the attack cooperatively. Given the electioneering in India, and Prime Minister Modi’s aggressive postures, sentiments could remain dampened until material triggers prop up.

From the market’s perspective, the macroeconomic stabilization – currency adjustments of 33% and interest rate tightening of 450 bps – seem to have yielded results. In January, the Current Account Deficit clocked in at ~USD 800m (3.5% of GDP) from peak’s 7% of GDP, and the Trade Deficit declined more than 30% to USD 2.4bn. Naturally, the currency depreciation led to increased inflation CPI to 8.2% (with unsustainable price changes in some vegetables). After plugging in the gaps in external financing through China, Saudi Arab, and UAE’s loans and oil credit facilities, the government is apparently navigating with the IMF’s bailout terms, which would more beneficial than if the bail-out package was undertaken in September-October last year. The reduction in the Current Account Deficit’s run-rate is sustainable and probably the catalyst equity investors were eyeing.

Meanwhile, the government has put most of its energy towards a) increasing Foreign and Local Direct Investments b) improving exports and c) targeting increased Tax-to-GDP ratio from 11.6% to 14.6%. Further on, the government welcomed Saudi Arabia’s Crown Prince, Muhammad bin Salman, with investments worth USD 20 bn in refinery, power, and food processing. Out of the commitments, USD 6bn should be pocketed within short term by selling RLNG power plants and awarding renewable projects. In order to show seriousness over tax (non) compliance the Federal Bureau of Revenue (FBR) has taken hardened measures involving catching tax evasion worth PKR 2bn (USD 14.2m) by a chief of Oil Marketing Company, sending notices to 6,000 rich non-filers to recover PKR +2bn, unearthed PKR 6bn loss from a battery manufacturer, live-integration of retail sales, registering the bearer prize-bonds used primarily in whitening sources of wealth and the Prime Minister’s resolve to improve and simplify tax-collection and ease of doing business. In a recent statement, PM is reported to have proudly reduced number of corporate taxes down from 46 to 17.

What we are seeing in tangible improving in the prospective economic climate in the country. We understand there would be a lagged negative fallout of rapid currency depreciation and abrupt monetary tightening the peak of which should be visible in a few months albeit reports cite IMF still demanding massive hikes in gas/electricity tariffs and the discount rate. The demand contraction is visible with ebbs being seen in the cement and oil sales. Well incorporated are those factors in the Index valuation right now, that too is trading at attractive asset values and in the business cycle, equity prices are similar to levels seen in 2013. We expect positives to outmaneuver negatives in this and next calendar year. In the short term, despite electioneering in India, the risks seem worth taking for value-hunters.

DISCLAIMER: Capital invested in a fund may either increase or decrease in value and it is not certain that you be able to recover all of your investment. Historical return is no guarantee of future return. The state of the origin of the Fund is Sweden. This document may only be distributed in or from Switzerland to qualified investors within the meaning of Art. 10 Para. 3,3bis and 3ter CISA. The representative in Switzerland is ACOLIN Fund Service AG, Affolternstrasse 56, CH-8050 Zurich, whilst the Paying Agent is Bank Vontobel Ltd, Gotthardstrasse 43, CH-8002 Zurich. The Basic documents of the fund as well as the annual report may be obtained free of charge at the registered office of the Swiss Representative.

The fund rose 4.2% in January, compared to MSCI FMxGCC Net TR (SEK), which rose 6.9%. The fund’s underperformance was primarily due to our underweight in Argentina (3% negative relative contribution) as Argentina rose 24% during the month. Our stock picks in Vietnam (1.5% negative relative contribution) also had a negative impact on the relative return because of market interest, which still is centred around the largest index weights. Furthermore, our lack of holdings in Kenya had a negative contribution of 1%. Positive contributions accrued from Pakistan (1.7% relative contribution), which had a significant rise in January. Our Turkish position MLP Care rose just below 30% during the month, giving a positive contribution of 0.8%. Finally, the absence of Romanian holdings had a positive contribution of 0.5% as the stock market continued to decline due to the uncertainty of a possible new tax legislation. In January, we sold two positions: Pakistani Gul Ahmed Textile which, after a sharp rise, now appears fully valued, and our remaining marginal position in Suez Cement which has been under divestment for some time now. We also reduced our positions in the Egyptian Banks Commercial Bank and Credit Agricole, by virtue of stronger convictions in other markets.

MARKET

MSCI FMxGCC Net TR (SEK) rose 6.9% in January, compared to MSCI FM Net TR (SEK), which rose 6%, MSCI EM Net TR (SEK), which rose 9.9%, and MSCI World Net TR (SEK), which rose 9.3%. January saw a strong recovery in global equity markets following the weak trend from early October to the end of the year 2018. Indications that the US central bank’s interest rate hikes may be over, falling bond yields in the US (but also the rest of the world), falling oil prices (which signal declining inflationary pressures), and reduced concern about an escalated trade war between the US and China meant that investors had the courage to return to the stock market. For emerging and frontier markets, the calm in the foreign exchange markets returned, where several countries’ currencies, after the devaluation wave in 2018, now appear to be cheap vs history. For some of the most troubled markets, such as Pakistan and Sri Lanka, we now see indications of improvement in the future account balance, which should result in less concern about continued devaluation. After a weak year in 2018, the mood tends to be relatively cautious, not to say pessimistic. As an investor, it is important to ignore both excessive optimism and pessimism. It should be remembered that frontier markets have undergone two major rectifications over the past five years, the first caused by the fall of Oil prices in 2014-2016, and the second due to the recent account crises in 2018. As we pointed out in our previous monthly letter, the asset class as a whole has delivered close to zero return over the past five years. Concurrently, the better companies grew and their economies developed. We conclude that emerging and frontier markets can close part of the gap relatively developed equity markets in the coming years.

DISCLAIMER: Capital invested in a fund may either increase or decrease in value and it is not certain that you be able to recover all of your investment. Historical return is no guarantee of future return. The state of the origin of the Fund is Sweden. This document may only be distributed in or from Switzerland to qualified investors within the meaning of Art. 10 Para. 3,3bis and 3ter CISA. The representative in Switzerland is ACOLIN Fund Service AG, Affolternstrasse 56, CH-8050 Zurich, whilst the Paying Agent is Bank Vontobel Ltd, Gotthardstrasse 43, CH-8002 Zurich. The Basic documents of the fund as well as the annual report may be obtained free of charge at the registered office of the Swiss Representative.

Padma bridge – One of Bangladesh major infrastructure projects, when finished in 2-3 years it will connect 25m people in southwest of Bangladesh to the mainland.

During the month, the Fund went up 7.1% in SEK as compared to the benchmark MSCI Pakistan Net (SEK)’s return of 18.1%. Part of the underperformance can be explained by lack of holdings in the energy sector, which performed strongly during the month. Also our overweight in Materials, primarily Cement, partly explained some of the relative losses. The unusually large deviation from the benchmark however stems from MSCI’s deletion of two of the members (United Bank Limited and Lucky Cement) due to technical reasons and that the benchmark now only consists of three members (Oil & Gas company OGDC and the banks Habib Bank and MCB Bank), each weighing between 30% and 35%. All three stocks rose significantly during the month as blue chips led the way. Provided that January’s rise proves lasting we expect the rest of the market to gradually follow and narrow the performance gap. The continuous narrowing of our legacy benchmark however accentuates the question of its current relevance. Since June 2017 the number of constituents in MSCI Pakistan Net TR index has been reduced from sixteen to now only three. We have therefor taken the decision to change benchmark to MSCI Pakistan IMI Net TR index on April 1st, 2019, which is composed of 25 constituents and better reflects the investable universe for foreign investors going forward

MARKET

The month started off on a good note. Although, the January Effect has been taught in Financial Markets 101 textbooks, this time it was the beginning from a very low-base. Pakistan, unusual for its own standards, depicted two consecutive years of USD return declines as the country battled with external finance pressures coupled with heated political transition. However, navigating through the storm with ~33% currency depreciation and 450bps of Monetary tightening, the worst does seem behind us, for now.

The friendly loans did keep the FX reserves, and the economy, afloat in this current Fiscal Year. USD 4bn have already been utilized from Saudi Arabia + UAE (with USD 2bn and USD 6bn Oil Credit Facility remaining). As we upload the monthly reports, the talk-of-the-town has it that China is willing to lend another USD 2.5bn to keep the reserves above 6-7 weeks of monthly imports. The Finance Minister, Asad Umar, reportedly has done a reasonably good job in reducing the IMF bailout from say a painful recessionary USD 20-25bn bailout to perhaps less than USD 10-12b. The rumor has it that the government shall soon (this month or so) sign an IMF bail-out package at reasonably better terms than those cash-starved scary examples in other frontier markets.

What triggered the jump from the low levels of KSE 100 Index was an almost 20% YoY improvement in the trade deficit in December. It seems certain that the economic adjustments – monetary and fiscal – have finally led to a reduced run-rate of currency outflows. In a recent interaction, the Finance Minister has said to have noticed even better YoY improvement in Exports (9%) and Imports (-20%) up to January 20th 2019. At this pace, we’re all-set to see a double-digit export growth in February 2019’s numbers, that should instill further confidence to the investors.
However, the adjustment’s pain is beginning to be felt. Cement Sales are down 20% YoY; Chinese hard-landing’s lower coal prices have kept the equity values intact nonetheless. Inflation is recorded at 7.2% in January and pro-active monetary tightening of 25bps last week has kept the economy close to balance signaling that interest-rates are about to peak-out. Similarly, Oil sales have also registered decline owing to ban on use of Imported Furnace Oil amidst rising competition eating the market share of listed Oil & Marketing Companies.

That stated, economic reforms are being taken for medium term growth. In the latest Economic Reform Package, the government has reduced duties on raw materials such as Plastic, Paper, Home appliances, Leather, and Auto sectors. The intent is simple; re-industrialization of the economy with a clear tilt towards USD-earning exporters. Globally renowned firms, such as Cargill International, have committed to invest USD 200mn in the economy with similar commitments from other players. Moreover, the February visit of the Crown Prince of Saudi Arabia, Muhammad Bin Salman is expected with much fanfare and investment deals over USD +10bn in a Refinery and Petrochemical complex to keep the animal spirits alive. We believe the earnings season would show the embedded margin compression and sales decline for most cyclical sectors which should be out-weighted by already-incorporated cheap asset-values coupled with improving economic prospects witnessed in the external financing sector. Signing the IMF deal by next monthly write-up should end prolonged uncertainty witnessed by investors, including us.

DISCLAIMER: Capital invested in a fund may either increase or decrease in value and it is not certain that you be able to recover all of your investment. Historical return is no guarantee of future return. The state of the origin of the Fund is Sweden. This document may only be distributed in or from Switzerland to qualified investors within the meaning of Art. 10 Para. 3,3bis and 3ter CISA. The representative in Switzerland is ACOLIN Fund Service AG, Affolternstrasse 56, CH-8050 Zurich, whilst the Paying Agent is Bank Vontobel Ltd, Gotthardstrasse 43, CH-8002 Zurich. The Basic documents of the fund as well as the annual report may be obtained free of charge at the registered office of the Swiss Representative.

In December 2018, the Fund went down 9.1% in SEK as compared to the benchmark MSCI Pakistan Net (SEK)’s return of -13.8%. The Index remained bearish due to a lack of clarity regarding the Balance of Payment’s external funding deficit in the medium term.

During December, the Fund reduced its exposure in Gul Ahmed Textiles and MCB Bank due to stronger out-performance and channeled the funds into DG Khan Cement and Maple Leaf Cement. We believe that the asset valuations of such companies are incorporating and reflecting overly pessimistic scenarios which, over the medium term, will likely show significant out-performances.

The main under-performing exposures this month were DG Khan Cement, Hum Network, Kohinoor Textiles and General Tyres. The out-performers included EFU Life, AGP Limited, K-Electric and Abbot Pakistan.

THE MARKET:

December did not bring any respite nor was there much Christmas cheer for investors in Pakistan, or across the globe (ask Apple’s shareholders!). Playing in the midst of medium term uncertainty on external financing and emerging from an abrupt 150bps hike in the monetary policy, the equity asset class trimmed its valuation in response to higher cost-of-capital. Pakistan’s latest diplomatic forays into securing an interim bailout of USD 6bn from Saudi Arabia, USD 6bn from UAE, and USD 2bn from China – and the recently speculated USD 2bn deferred LNG payments to Qatar – has kept it afloat with FX reserves kissing 7 weeks of imports. However, for sustained economic comfort, it is imperative that the government secures an IMF package and provides clarity to the markets, investors and analysts.

Equally, but marginally less, worrying is the FATF’s evaluation of Pakistan’s classification in the grey-list. The government has taken several measures to significantly improve financial structures to reduce money laundering – yielding political brownie points – however a best-case scenario still hinges on the Pak-US relationship. President Trump’s belligerent attitudes seem to have mellowed somewhat as Pakistan facilitates the extrication of US forces from Afghanistan but rapid changes in the US’s Pentagon and military leadership is creating ambiguity. Privately, the US has stated that it enjoys near-veto powers in the IMF, and insists that US dollars must not be channeled to China. However, such concerns may be allayed by a statement by the US Treasury saying that Pakistan’s debt repayment to China will likely start after the IMF program concludes.

Economically, the numbers are improving albeit at a slow pace. CPI clocked in 6.17% for December, remittances growth was 2% Y/Y and the Current Account Deficit (CAD) was USD 6.1bn in 5MFY19 vs USD 6.8bn in the same period last year. That said, a 33% depreciation and 425bps monetary tightening has begun to show an improving trend and as per our expectations – assuming oil below USD 60 – the CAD can normalize to 2.5-3% of GDP in less than a quarter. Backup plans such as the government’s efforts to explore other avenues of financial support are necessary, especially in the highly unlikely scenario of IMF talks collapsing. With this in mind, the government has recently announced a Diaspora Bond offering USD 5 – 5.5% per annum and is introducing the Panda Bond. Nonetheless, to create confidence among investors and other multilateral lenders such as the World Bank, Asian Development Bank etc., the IMF’s nod of approval is crucial to deflect the hanging sword.

Looking ahead, in January 2019 we should have put the worst economic adjustment behind us, or virtually all of it. FDI from UAE and Saudi Arabia in an oil refinery in Gwadar, investment is speculated at USD 6-8bn, will create positivity as will the talks with the IMF, scheduled for the third week of January. The Finance Minister is also expected to introduce a mini-budget to address fiscal and external challenges in the country now that he has dug deep into economic numbers. Symbolic measures such as the recommencement of British Airways, Portugal’s removal of a travel advisory on Pakistan, the Prime Minister’s focus on improving ease of doing business and clamping down on poor governance will yield results in the medium term. The quick-fix requires an IMF bailout but not at the cost of the country’s growth trajectory. After two consecutive years of stock market decline – an unusual occurrence for Pakistan – we are starting from a low pessimistic base but are optimistic about closing the year on a much better note.

DISCLAIMER:
Capital invested in a fund may either increase or decrease in value and it is not certain that you be able to recover all of your investment. Historical return is no guarantee of future return. The state of the origin of the Fund is Sweden. This document may only be distributed in or from Switzerland to qualified investors within the meaning of Art. 10 Para. 3,3bis and 3ter CISA. The representative in Switzerland is ACOLIN Fund Service AG, Affolternstrasse 56, CH-8050 Zurich, whilst the Paying Agent is Bank Vontobel Ltd, Gotthardstrasse 43, CH-8002 Zurich. The Basic documents of the fund as well as the annual report may be obtained free of charge at the registered office of the Swiss Representative.